Thursday, January 28, 2010

For-Profit Higher Ed: Success or Failure?

by Daniel L. Bennett

There has been some interesting discussion recently related to the success or failure of the for-profit sector, prompted by Charlotte Allen's essay for Minding the Campus in which Allen described the sector as

plagued by high levels of student debt, high loan-default percentages, dismal graduation rates, and third-rate reputations that lead some employers to reject their graduates automatically

Allen's assertion that the for-profit sector is plagued by high debt levels and default rates, and low graduation rates is only one side of the story. Jane Shaw correctly asserted that:

Profit-seeking entrepreneurs always look for niches that others are not yet serving successfully — in this case, working adults, some with families and many with low incomes, who want education or degrees. For-profit schools are addressing their demands.

The truth is that this sector provides educational opportunities to an under-served segment of the population - low income, minority, and first generation students who likely did not perform well enough in high school to get into a tradition 4-year college. Many of these students tried the community college route before enrolling in a proprietary school, but they were not satisfied with the service that they received. The fact that such students would have lower levels of success and higher levels of debt than middle income, high achieving students should come as no surprise.

Now Allen, Shaw and myself are all advocates of free markets and would very much like to see the market-funded sector flourish by developing models that deliver high-quality education in an efficient manner, but Allen appears more skeptical about this prospect than Shaw or myself due to the "corrupting influence of federal money," suggesting that for-profit colleges are more focused on increasing enrollments than boosting the value of their degrees.

I agree with Allen's statement that the free pool of money provides an incentive for colleges to engage in economic rent-seeking, as open access to government funded student loans has greatly distorted the college education market. It allows colleges to charge as much as they can get away with, and this is certainly not limited to the for-profit sector, as Shaw notes that

Public universities and nonprofits do not exactly have clean hands on this issue. They depend on students who use federal aid, too

In fact, I hypothesize that the problem is exacerbated in the for-profit sector by the 90/10 rule, which requires that institutions obtain at least 10% of their revenue from non-federal aid sources. What this has in effect done is permit for-profit colleges to set their tuition higher than the total grant and loan limits - well above the equilibrium price in which they are able to offer courses.

However, I disagree with Allen's assertion that all market funded schools are more focused on boosting enrollment than enhancing the value of their educational offerings. Allen seems to singularly focus on the University of Phoenix, which is the largest and most visible for-profit institution, however, it is only one of more than a thousand profit-seeking colleges, many of which are performing similarly to highly regarded public and private not-for-profit institutions in terms of student outcomes such as loan default rates and graduation rates. Grand Canyon University, for example, has a 3-year cohort default rate less than 3%, with Walden University and American Public University sporting similar rates. In contrast, Ohio State University has a CDR of 5.5%.

The truth of the matter is that there are some wonderfully innovative things happening in the market funded sector that have the potential to reshape the landscape of American higher education. With time, the sour apples will be rooted out and the remaining entities will shine brightly. This is why I contend that for-profit higher ed will eventually be deemed a success.